31 October 2021
INVESTING
New Pan Africa Debt Fund provides institutional investors with more choice
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TANLIB has announced the launch of its Pan Africa Debt Fund that will allow investors to tap into the attractive dollar yields, geographic diversification and fast-growing economies presented by the African continent. The open-ended Pan Africa Debt Fund aims to generate stable income and capital growth with a target return of three-month US dollar Libor plus 6% over a three-year rolling period. Managed by STANLIB’s Credit Alternatives team, the Fund will invest in hard currency debt predominantly listed on global exchanges issued by African sovereigns and corporates. The Fund will always hold at least 60% of assets under management in sovereign Eurobonds and can include up to 30% in unlisted credit. Johan Marnewick, Head of STANLIB’s Credit Alternatives, commented: “We see tremendous value for our clients in the launch of a pan-Africa strategy. The Pan Africa Debt Fund will meet the longstanding demands of South African and international institutional investors for well-diversified and attractive exposure on the continent, packaged in a compelling vehicle. Our Fund will appeal to institutional investors seeking returns that are less correlated with the performance of other global and emerging market assets.” Until now, institutional investors, both in South Africa and other territories, have had limited choice in accessing funds that offer broad exposure to Africa’s high-growth frontier and emerging market debt. The Pan Africa Debt Fund offers investors access to attractive yields available in the wider African market, through a vehicle that is managed within a comprehensive risk management
framework designed to minimise downside risk. African debt has a low correlation with global bond and equity markets, which makes it an important tool for diversification within asset portfolios. Additionally, the Fund’s investments will be largely dollar-denominated offering South African investors hard currency exposure. Adding his voice to the launch of the Fund, STANLIB CEO Derrick Msibi said: “We are extending our capability from being a leading fixed income manager to include growing exposure to emerging markets. We are offering investors carefully curated exposure to African credit through the Pan Africa Debt Fund, which not only offers attractive investment opportunities but also builds and deepens financial markets. Over the next five years, Africa is forecast to be one of the fastest-growing regions globally, which will require financial capital. The investments in the Fund will play a role in funding the continent’s post-pandemic recovery, while offering investors exposure to attractive opportunities.” Africa is expected to have a robust post COVID-19 recovery, with growth averaging above 4% from 2022 to 2026. Sub-Saharan Africa specifically will remain the second fastest growing region in the world after Emerging Asia. The continent’s long-term growth is underpinned by
“African debt has a low correlation with global bond and equity markets”
structural tailwinds that are expected to drive economic activity for decades, including an increasingly developed, burgeoning and youthful population. Africa is also experiencing higher levels of investment in energy, transport and telecommunications infrastructure, a steady rise in urbanisation and increasing Johan Marnewick, Head: Credit Alternatives, STANLIB regional integration. These long-term trends should provide the backdrop for Africa’s attractiveness as an investment destination to continue to improve. By adhering to the ESG framework, this Fund will result in an enhanced ecosystem that will contribute to improving standards of governance, and will help to broaden economic development opportunities. Investors in the African Eurobond market have experienced returns in excess of 8% annualised over the last 15 years. STANLIB Credit Alternatives has a successful eight-year track record of investing in African US Dollar debt assets. In sourcing and risk managing Fund assets, STANLIB will continue to leverage its longstanding relationships with banks and other financial institutions active on the continent.
SA debt crisis is avoidable, despite rising risks BY SANDILE MALINGA Portfolio Manager, Prudential Investment Managers
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here’s no question that South African investors are facing an increasing risk that the South African government might, at some point, be unable to repay its debt, and therefore spark a sovereign debt crisis. This is if nothing is done in terms of narrowing the government budget deficit and implementing more structural reforms to spur economic growth.
In emerging markets like South Africa, research has found that investors’ tolerance for high sovereign debt/ GDP levels reaches a breaking point at around 80% or so (or lower in the case of countries with high debt service costs). This is the debt/GDP level where we found ourselves in FY 2020/21, and National Treasury’s projections show it reaching 88% by 2025/26. This upward trajectory has been caused by unexpected pandemic costs and rising government budget spending, combined with disappointingly low growth since 2015. The government is now spending far too much on wages and debt servicing costs as a percentage of its revenue, leaving it significantly less for funding more productive investments like infrastructure, healthcare and education improvements that will boost economic growth. We are at the point where debt is ‘crowding out’ investment and impacting negatively on our growth rate. If we are unable to implement budget spending cuts, as well as successful structural reforms, and attract investments that increase the economy’s capacity for growth, South Africa could face a vicious circle of rising debt and deteriorating growth that results in a debt crisis. But is this scenario inevitable?
“SA’s external finances, a key element of our sovereign credit rating, have performed well during the pandemic” The government is making efforts to reduce its debt levels through negotiating public sector wage cuts and planning for lower spending in its Medium-Term Budget plan. It is embarking on important structural reforms, among them including: liberalising the energy sector by allowing companies to generate electricity from multiple sources (so-called embedded generation); reducing the red tape facing new companies by cutting the time required to approve a start-up business to only 48 hours; and securing much-needed domestic and foreign investment totaling around R780bn through its series of investment summits. One example of this has been the new Amazon data centre set up in Cape Town. Although these investments will take time to be realised, they will create even more business opportunities and new jobs that will spur economic growth. On another positive note, South Africa’s external finances, a key element of our sovereign credit rating, have performed well during the pandemic, with the country
achieving its first current-account surplus since 2002 at 2.2% of GDP. At Prudential, our view is that a sovereign debt crisis is avoidable – all of these efforts should help South Africa avert it. In fact, there has been no better time to buy South African assets than the present, due to the extreme pessimism weighing on local markets. The current very high yields on government bonds are compensating investors well for the risk involved in owning them; for example, 20-year bonds offer equity-like returns. As an asset class, SA bonds have the potential to deliver a real return of 4.6% over the next three to five years. At the same time, South African equity valuations are also very attractive relative to their own history and versus offshore equities, offering a potential real return of 10.1% over the medium term, based on our calculations. By constructing well-diversified portfolios, including local asset classes as well as global assets, investors should be well-positioned to achieve higher-than-average returns in the next three to five years.
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